A Review of the Department of Insurance
June 2009
REPORT (PDF) SUMMARY (PDF)
Members of the General Assembly requested the Legislative Audit Council to conduct an audit of the South Carolina Department of Insurance (DOI). Our audit focused on four main areas:
• Workers’ Compensation Insurance
• Coastal Property Insurance
• Overall Regulation of Insurance
• Captive Insurance
While we found that DOI generally regulates the insurance industry appropriately, we found many areas where improvement is needed to ensure that the department, the insurance industry, and the public are aware of possible problems and issues. Our findings are summarized below.
Workers’ Compensation Insurance
We reviewed how DOI regulates workers’ compensation insurance by examining rate filings and overall industry data. We also looked at how other states regulate workers’ compensation insurance to recommend possible changes in state law.
• Overall, 73 (97%) of 75 of the rate filings reviewed had missing information. This information included financial data, actuarial reviews, and approvals. Forty-one filings (55%) were exempt from prior approval based on the deregulation in South Carolina law between 2003 and 2007.
• Without a summary document or checklist in each filing, as well as the appropriate information from insurers, it is difficult to determine if the appropriate analysis or any analysis was conducted by the department.
• Insurance companies are allowed to use any year’s loss cost data when calculating rates. In order to prevent the possibility of companies’ manipulating rates and to be consistent with other states, state law should be amended to require insurers to use the most recently approved loss cost data when calculating rates.
Coastal Property Insurance
We reviewed how DOI regulates coastal property insurance and if that regulation is in compliance with state law and insurance industry standards. We also reviewed how the South Carolina Wind and Hail Underwriting Association (SCWHUA) operates. The regulation of coastal property insurance was also examined to determine if any changes could be made to improve the regulation in South Carolina.
• Nine (25%) of 36 filings reviewed had no evidence of DOI’s review or an explanation of its decision. Completing checklists that DOI already has and including them in the file would show that the department is evaluating all aspects of the filings and how it reached its decision.
• As required by state law, SCWHUA should include procedures in its plan of operation for procurement of reinsurance. These procedures should include better use of evaluation criteria to make the process more open and objective.
• The department should continue its efforts to evaluate hurricane models for South Carolina to ensure that the rates charged by insurers are appropriate.
Overall Regulation of Insurance
We reviewed how the department regulated other types of insurance such as life, health, and automobile insurance. We looked at how DOI ensures the financial solvency of insurance companies and reviews rate increase requests.
• We reviewed rate change requests submitted to DOI to determine whether adequate procedures were in place for analyzing the requests in order to make appropriate decisions for approval or denial. We generally found adequate support for the decisions. By failing to document all aspects of a rate change request, the department’s decisions may not be adequately explained or supported.
• We reviewed the operations of the financial analysis division to determine if the department ensures that insurance companies comply with South Carolina law and National Association of Insurance Commissioners’ (NAIC) guidelines. We found that the files contained adequate documentation to establish that desk audits had been conducted in accordance with South Carolina laws and NAIC regulations. However, none of the samples indicated that the risk-based capital ratio had been reconciled between the company’s annual statement and the NAIC calculations.
• Our examinations of the DOI schedule of audits confirmed that examinations were scheduled and completed in accordance with state law.
Captive Insurance
We reviewed DOI’s regulation of captive insurance companies which are a risk-financing method or form of self-insurance involving the formation of companies to serve the insurance needs of parent companies or their members. We found that generally the department’s licensing and examinations of captives complies with state law and regulations. We did find the following problems with DOI’s regulation of captives.
• We found that the department did not collect all of the required information from companies. Without this information, the department may not be able to adequately determine if the company will be able to remain financially solvent and protect its parent company or members.
• The department did not have standard procedures for conducting the financial examinations of captives which are not risk retention groups. These examinations are required by state law. The agency has now developed standard procedures and, according to an agency official, implemented them in December 2008.
• We reviewed DOI’s schedule of examination dates for captives and found that 43 (81%) of 53 reviews had not been completed within the three-year period required by state law. By not having procedures as discussed above and failing to complete examinations as required by law, the department cannot adequately ensure that the captive insurance companies are able to meet their financial obligations.